asset allocation |  september 21, 2020

U.S. Presidential Elections and Stock Markets

Which One Leads the Other?


Key Points

  • We look at historical data to answer two simple questions: “Do U.S. presidential elections really matter for stock markets?” and “Which one leads the other?”

  • We find using election dates as a market-timing indicator is inconclusive, and volatility around presidential elections is slightly less than in other years, contrary to common belief.

  • However, stock market returns have historically been good predictors of presidential election outcomes, particularly three-month returns prior to the election.

Thomas Poullaouec

Head of Multi-Asset Solutions, Asia Pacific

Nathan Wang

Solutions Analyst, Multi-Asset Solutions, Asia Pacific

Let's make our position clear upfront: if readers are searching for insights on how a Trump or a Biden presidency might impact stock market returns in the coming years, please stop reading now. For readers who are curious about historical relationships between the timing of U.S. presidential elections and stock market returns, please proceed.

An important disclaimer of this paper is the limited data set we are drawing our conclusions from. We are employing a rather modest amount of data to make any statistically significant conclusions on the relationship between elections and stock market returns. Although our data set goes back to 1927,1 there have only been 23 presidential elections since then. Some of them occurred at very interesting times, such as after the Great Depression (1932); during the Second World War (1940 and 1944); and, closer to the present, at the onset of the tech bubble burst in 2000 and the global financial crisis in 2008. This means that market returns around those elections were largely impacted by these historic events rather than by the results of the elections. Of note, isn’t that dynamic similar to what we are experiencing today, where the coronavirus pandemic is expected to dominate both market returns and the election?

In this paper, we will cover the following topics: The first section will look at whether there are any consistent patterns of stock market returns around U.S. presidential election dates, the second section will investigate whether election outcomes have an impact on the stock market, and the third section will focus on the efficacy of the stock market in predicting election outcomes. We conclude with some brief comments as to how the 2020 election might differ from our historical findings.

Do Elections Matter for Stock Market Returns?

First, we calculate the calendar year returns of the S&P 500 Index during presidential election years, and then we compare them with the calendar year returns of the other years and all years.

1We would like to thank Katie Deal, a Washington analyst in our U.S. Equity Division, for her insights. We would also like to thank our friends at Strategas Research for their helpful assistance in this research.

Additional Disclosure

The S&P 500 Index is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”), and has been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). T. Rowe Price is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of September 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only. Actual outcomes may differ materially from expectations or forward-looking statements.



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